Real virtuality

The Malta Independent

Real Virtuality

The Euro has turned from a virtual to a real currency.` Three hundred million people can now feel the hard Euro notes and coins and actually make purchases in Euro as the national currencies start disappearing over the next few weeks.

Beyond the unavoidable change-over problems one has to look at the real benefits or disadvantages of this mega project. The obvious question that presents itself is whether the Euro project is an end in itself which has now been practically completed although it still` needs to withstand the test of time.` Or is it a means to a bigger end which will become more evident and defined once the means of the Euro project gains acceptance as a` reality project and once the barriers of national currencies are consigned to history.

Three existent member states, incidentally all three of them not forming part of the European mainland, seem to suspect that there is more than meets the eye in the Euro project.` UK,` Sweden and Denmark seem to suspect that once the Euro project is realised it will become clear to one and all that its sustainability can only be protected if fiscal policy is also co-ordinated.` Some politely refer to it as fiscal harmonisation.` However this could be just a mild beginning leading to a fiscal union just as the EMS that` started way back in the late 70`s eventually lead to a monetary union.

Can a monetary union survive if countries partaking in the union follow divergent fiscal policies Can Ireland`s economy growing at a real` 6% be served by the same interest rate applicable to Germany whose economy is contracting In a monetary union aspiring for longevity the answer is no. Ireland will have to use its fiscal policy to calm down its economy to bring it in line with a rate of interest meant to serve the interest of the economic motor of France Germany and Benelux rather than the interest of the small peripheral countries.

So unless Ireland wishes to risk an economic bubble with serious consequences which invariably arise when bubbles burst ( Japan is still nursing the consequence a 10 year old burst bubble) and having lost control over its own monetary and rate of exchange policy Ireland will be constrained to use its only available tool of fiscal policy to calm down its economic growth to the requirements of those countries whose economic conditions unavoidably weigh much more on the policies set by the European Central Bank.

This argument leads to the question of whether in reality members of a monetary union can still expect` to have real veto rights on fiscal matters as the EU treaties, with the latest versions coming out of Nice, still try to pretend` It is these uncertainties which have so far kept the three EU member states which traditionally are more in favour of a loose European Union of Members States rather than a centrally controlled Federalist Union to pause and wait before taking the monetary plunge.

New members will not have this facility. They are expected to proceed from EU membership to monetary union adherence as a matter of course in the time frame of a few years, not less than two but not much longer either.

From` those who argue that on membership Malta would be able to preserve its sovereignty on taxation I would welcome some re-assurance about practical experience of monetary unions where participating members were not obliged to harmonise and unify their fiscal and budget policies`

I am all in favour of giving a greater weight to the Euro in our basket of currencies and I can even conceptualise the possibility of 100% alignment to the Union if economic circumstances so dictate.` But aligning ourselves through our totally reversible internal decision is far different from monetary union. This would be irreversible and` takes away the possibility of using monetary and rate of exchange policy tools leaving little option but to align fiscal policy as well to the real drivers of the monetary union.

Acknowledging the Euro`s reality we should preserve its` virtuality!